By Dong Liu, the Senior Research Analyst at King’s Private Equity Club
As impact and sustainability become the trending topics among investors and students of finance, a peril that is not mentioned as often is the one of ‘greenwashing.’ Stemming from the word ‘whitewashing,’ greenwashing refers to the deliberate attempt by corporates to conceal products that are environmentally unsound. With the growing demand for green products among consumers, a number of companies have been using the furtive tactic to present an environmentally responsible image to the public.
Greenwashing, in fact, is not a new concept. The word was first coined in 1986 by Jay Westerveld, where he accused hotels of asking their guests to reuse towels. These hotels, by his investigation, were not genuinely concerned about the environment. Rather, they only did so to reduce their cost. Since then, the word ‘greenwashing’ has been applied to describe many problematic practices by companies, including the renaming, rebranding and repackaging of environmentally unsound products.
In 2007, TerraChoice outlined the seven sins of greenwashing in an effort to help consumers to identify misleading environmental claims. They are the following:
- the sin of the hidden trade-off (that is, the narrow focus on certain attributes of a product and its production while ignoring other attributes that are not environmentally friendly);
- the sin of no proof (that is, claiming a product to be environmentally friendly without providing accessible information or third-party certification);
- the sin of vagueness (that is, defining a product with broad terms that can be misunderstood by consumers, such as the term ‘natural’);
- the sin of worshipping false labels (which gives the illusion of a third-party certification);
- the sin of irrelevance (that is, making claims about the green aspects of a product that are in reality unhelpful);
- the sin of lesser of two evils (which distracts consumers from the greater environmental problems caused by a product); and
- the sin of fibbing (that is, making false environmental claims).
It can be seen that the clandestine practices of greenwashing vary greatly. Without being aware of its existence, unsubstantiated claims made by companies can be easily accepted by consumers, as well as investors. Due to an increased focus on companies’ environmental performance, creating a responsible image has become effective in increasing the demand for their products and equity. Meanwhile, their costs may not have increased or even decreased in some cases.
In the absence of scrutiny, greenwashing practices are not only problematic in failing to generate legitimate impact but also in encouraging other companies to imitate and bend the truth. For venture capitalists, this is a dangerous trend — as it will be more difficult to distinguish between ventures that are truly environmentally friendly and the ones that are not.
The negative impact of greenwashing on the brand itself is also evident from current studies. Wahba (2012) understands greenwashing and such environmental advertising as a cultural aspect. By doing so, he explores the relationship between green advertising and consumer behaviour. He finds that 68% of consumers consider green advertising as greenwashing. As a result of a chain effect, the level of distrust in companies’ environmental claims decreases.
Another challenge for investors is the difficulty in inspecting start-up performance. Investments are consistently a more risky and rewarding business for start-ups because they do not have a working product, a customer base, nor a revenue stream. As a result, they are spared the same level of scrutinisation as big companies. In addition, they may dodge the greenwashing label by default by embracing impact superficially.
While venture capitalists do not seek long-term returns, they still expect ventures to reach sufficient size and obtain decent credibility. Investing in greenwashed products translates to bearing greater risks. With the hidden prevalence of greenwashing practices and consumer distrust, risks may have already been embedded in venture capital investing.
Unfortunately, the existence of greenwashing can still be easily overlooked. Avoiding it requires the conscious effort of scrutinisation and a more precise way to measure the net impact generated by companies. These include the publication of reliable and specific information — financial and non-financial — on companies’ official websites. In the case of third-party publications, it is crucial that there is transparency in audit processes and stakeholders.
At the current stage, aggregate studies on the prevalence of greenwashing are still lacking. To understand the problem of greenwashing, one needs to inquire further into the diverse analyses of the mechanisms between companies’ strategic adjustments and the growing interest in impact and sustainability.
Ending on a hopeful note, though, capitalising on the demand for green products may only be a temporary response to the increased focus on environmental performance. Real changes may be made, and more profits may be gained when the obstacle of greenwashing is overcome eventually.
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Reference list
https://www.investopedia.com/terms/g/greenwashing.asp https://www.investopedia.com/articles/personal-finance/041315/risk-and-rewards-investing-startups.a sp https://www.ul.com/insights/sins-greenwashing https://www.mdpi.com/2071-1050/12/4/1679 https://www.sciencedirect.com/science/article/pii/S187704281203399X?via%3Dihub https://hbr.org/1998/11/how-venture-capital-works https://www.ft.com/content/5cb02b8b-a3b4-419f-ba43-4754924d87d4 https://www.ft.com/content/28688bd3-cc09-442e-ba53-43b1ff284408
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